GregoryBresiger.com often talks about the best ways to save for retirement or achieve financial independence as soon as possible. Today let’s examine the opposite. Let’s look at an unforced error that led to the destruction of retirement assets.
This column begins with a warning: Don’t make this mistake. Don’t let a friend make this mistake. Don’t like a child or a grandchild make this mistake.
Please.
I Don’t Want to Be Well-Off
Here’s a great way to ruin one’s retirement plan. You do it by wrecking the principle of compounding, which we have seem is one of the biggest factors in creating wealth.
Yet interrupting the compounding factor is what millions of consumer crazy people do every time they pass by a showroom or hear that there is a one-time sale and that they must buy now.
Do what I am about to recount to you and you ensure that you will miss the chance to accumulate significant retirement money. I saw the mistake. I am sick thinking about it even decades later and even though it had no effect on me.
A Journalist’s Woes
Working at a financial publication 30 years ago, a young woman I knew at another business publication—who was actually a financial journalist and should have known better—decided to break into her qualified account so she could buy a car.
By the way, she lived in Manhattan and really didn’t need a car. I suppose it was nice to have a car—and expensive as anything to keep it up—but it was anything but a necessity; the reporter would still have her job without the car.
She had about $30,000 in her qualified account. However, since she was using the account before age 59.5 and since there were no exceptional circumstances, such as a medical event, the government penalized her 10 percent for breaking into her account early. It also required she pay all the investment taxes before she received what was left of her qualified account, which was drastically reduced by the taxes and penalties.
A Really Expensive Car
I hope she enjoyed her car—which she barely had enough money to buy after her retirement plan was gutted—because it came at quite a price: Now her retirement account was wiped out. But she had her set of wheels. Not only was the account lost, along with employer matching contributions and tax breaks, so were years of compounding. I know many people like cars and I’m just the opposite, but was it really worth it?
Advisors tell clients that, at any age, and regardless of whether you are trying to build or preserve assets, understand how important the compounding process is in building or preserving wealth. It is the key factor in determining if many people will be able to live comfortably in their 60s and beyond.
Please, Please, Help Others to Save
At a retirement plan sponsor conference that I attended decades ago, a retirement plan official pleaded with employers to help their employees understand how important it was for them to contribute on a consistent basis to qualified accounts and to leave them alone until retirement.
“For many of your employees,” he warned, “this will be their only chance to accumulate significant assets.”
Why did he say that? A few reasons.
No or Little Savings
Many Americans tend to have little in savings outside of their qualified accounts. Many surveys have shown that tens of millions of Americans have less than $1,000 in savings and they’re not all poor people. They don’t have to be in such a perilous situation.
Indeed, a lot of them have good middle-class incomes, yet their finances are so perilous that a sudden $5,000 bill will push them into financial disaster. They end up borrowing thousands of dollars and paying 20 percent interest. They are on the road to financial serfdom, a road built and maintained by credit card companies.
Still, many of them, like my friend, make middle class incomes. With patience and a few bull markets, they should be able to achieve financial independence over a few decades. They have promising profitable careers ahead of them. Their biggest years of earnings are in front of them.
No Need to Wreck a Savings Vehicle
My friend mentioned above had a much more successful career than I ever did. She went on to work for a major business wire service. Had she waited a few months or a few years to buy the car, I believe she could have bought the car without destroying her retirement account.
Don’t make her mistake. That care of yourself. Take care of your qualified retirement accounts. They are usually one of the most important ways that people reach financial independence. Don’t gut a major savings vehicle for a momentary luxury.
